An overview of Personal Tax – what do you need to know?

The topic of taxation can be a confusing topic to talk about and one that isn’t often discussed in the open by many taxpayers. 

Personal tax queries and issues can seem intimidating, especially if you are new to managing your finances or have recently moved to the UK – but it doesn’t have to be complicated. 

There are lots of different forms of taxation in the UK, including:  

National Insurance Contributions (NICs) 

National Insurance, although not technically a tax, is a compulsory contribution which is made by employees and self-employed individuals. Employers are required to make contributions that are paid separately.  

The NICs help to fund state benefits like the State Pension, Universal Credit, and the NHS. 

You pay a specific amount, which is based on your employment status and your employment level. 

From 6 April 2024, self-employed individuals will no longer have to pay Class 2 NICs from 6 April 2024, and they will pay a Class 4 NICs rate of 8 per cent down from 9 per cent. 

From 6 January 2024, Class 1 NICs paid by employees will decrease from 12 per cent to 10 per cent. 

For further information, you can read more about the changes here

Income Tax 

Income Tax is another compulsory contribution made by employees. 

The tax is calculated based on the total amount of income earned; this includes wages, pensions, interest, and any other sources of income. 

Different rates apply to several tax bands: 

  1. Personal Allowance –the first £12,570 of your income is tax-free 
  1. Basic Rate – you will be taxed 20 per cent on income between £12,571 and £50,270 
  1. Higher Rate – you will be taxed 40 per cent on income between £50,271, and £125,140 
  1. Additional Rate – you will be taxed 45 per cent on income over £125,140 

Although Personal Allowance applies to the first £12,570, you need to know that the allowance could decrease or be removed entirely for incomes above £100,000.  

A taxable income of over £125,140 means you will not receive Personal Allowance.  

This decreases by £1 for every £2 that your adjusted net income is above £100,000. 

You will also need to do a Self-Assessment Tax Return if you do not benefit from the PA, even if your income is already reported via Pay As You Earn (PAYE). 

Capital Gains Tax (CGT) 

CGT is charged on the gains made from a sale, transfer, or disposal of assets like property, shares, or valuable possessions. 

The Annual Exempt Amount is an annual tax-free allowance that allows a certain number of gains before paying CGT. 

In April 2024, this allowance will be £3,000. 

The rate of your CGT depends on the type of asset you sell/dispose of, and your Income Tax band too. 

The rates of CGT are: 

Individuals 10 per cent and 20 per cent  
Individuals for residential property and carried interest 18 per cent and 28 per cent 
Trustees/personal representatives of some who has died (not including residential property) 20 per cent  
Trustees/personal representatives of some who has died for disposal of residential property 28 per cent  
Gains qualifying for Business Asset Disposal Relief 10 per cent  
Capital Gains Tax on property where the Annual Tax on Enveloped Dwellings is paid (annual exempt amount not applicable) 28 per cent  
Companies (non-resident CGT on the disposal of a UK residential property) 20 per cent  

Inheritance Tax (IHT) 

IHT is charged on the value of an estate after their death; this includes property, money, and possessions. 

The tax-free threshold, known as the ‘nil-rate band’, is currently set at £325,000. Any estate above this threshold will be taxed at 40 per cent. 

There is also the ‘residence nil-rate band’ (RNRB) which permits an additional £175,000 to be passed on tax-free when a main home is left to a direct descendant, like your children. 

Any unused allowance from both the nil-rate band and RNRB can be passed to a surviving spouse or civil partner, allowing couples to pass on up to £1 million free of IHT (given the right circumstances). 

There are also other exceptions and strategies available to provide relief, including gifting, trusts and other reliefs.  

Self-Assessment Tax Returns 

If you are a self-employed individual, a sole trader, or you have additional income sources then you must complete an annual Self-Assessment Tax Return. 

Within this process you must: 

  • Declare your income, including interest earned via savings 
  • Calculate your tax liability 
  • Make any necessary payments 

The deadline to submit your tax return online (and pay any outstanding tax) is 31 January following the end of the tax year.  

Most people are taxed via the PAYE system; your employer or pension provider uses this system to take Income Tax and National Insurance contributions before you are paid your wages or pension. 

If you are unsure of how much you pay, your tax code will tell you further information. 

Need guidance or advice on Personal Tax? Get in touch with us today. 

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